Ethnic/Informal Economy

Ethnic/informal economy is inconsistently defined by scholars. This slows progress in explicating the social underpinnings of ethnic/informal economies and in understanding how these economic systems affect the socioeconomic well being of members of various ethnic groups. Fortunately, there is a common theme to the definitions one finds in the literature. All variants convey a sense of economic action embedded in solidaristic, co ethnic social relations. Economic behavior is influenced by informal rules and practices that govern the normative behavior of group members. Beyond this common theme, however, widely differing definitions involving self employment, employment niches among those who are not self employed, and geographical clustering have been applied. Light and Gold (2000) suggest three definitions as a way to reduce this chaotic state of affairs. The first is the combination of business owners, unpaid family labor, and paid co ethnic employees (ethnic ownership economy). The second includes the first, but adds the requirement of spatial clustering (enclave economy). The third points to occupational and industrial employment niches (not business ownership) where the overrepresentation of an ethnic group enables its members to benefit from the advantages of informal control (ethnic controlled economy).

An informative literature has emerged despite the lack of consistency in defining ethnic/informal economies. Researchers concentrate on how foreign born groups establish and maintain economic niches that are usually accentuated by a profusion of small businesses. The field examines how limited acculturation and structural assimilation in the immigrant generation gives rise to collective action that promotes enterprising economic action. A substantial body of research documents how immigrant minorities draw on social ties in order to facilitate the development of informal economic relations. Family ties and ethnic group membership typically provide the social underpinnings of these economic relations.

The ability to draw on social connections in order to gain access to resources that are useful for economic action is an example of what scholars refer to as social capital. The literature describes many ways in which immigrants make use of family and ethnic based interpersonal connections in gaining access to resources such as business related information and financial credit. Understanding these practices, which are often steeped in informal institutionalized arrangements, is essential for understanding the origins and maintenance of ethnic/informal economies.

Bonacich and Modell’s (1980) study of three generations of Japanese Americans reveals how hostility from the dominant group can generate a defensive reaction from minority groups. In the case of the Japanese on the US West Coast, this encouraged ethnic solidarity and strengthened social boundaries that were reinforced by a shared sense of ethnic identity. This strong sense of community, in turn, gave rise to cooperation and collective action that generated and distributed group resources that facilitated the rise and expansion of the Japanese ethnic economy. This economic system was the basis of Japanese upward mobility prior to World War II. Scholars show how ethnic businesses fill niches created by the demand for goods and services in an ethnic community. These markets are partially closed to out group businesses due to cultural and ecological barriers. Research also considers the role of informal credit and savings associations in helping prospective entrepreneurs acquire startup capital and in expanding the availability of credit to those who already own a business. Such economic activities, embedded in social relations, necessitate a sense of interdependence among in group members that engenders trust and solidarity, and allows for sanctions to be imposed on those who violate the trust of others (Portes & Sensenbrenner 1993).

Interest in ethnic/informal economies is part of a larger scholarly interest in economic segmentation. This view conceives of the labor market as divided into a primary market where opportunities for advancement are prevalent and a low wage secondary market with little opportunity for advancement. In the wake of growing international migration in the 1960s and 1970s, scholars concerned themselves with the range of economic options encountered by immigrants. Concluding that these opportunities were limited, researchers began to explore how the economic advancement of immigrant minority groups might be generated in a con text of labor market segmentation and ethnic based strategies of economic action.

Thus far, a large share of this research has been produced in the United States. This is not surprising given the importance of immigration in the history of the country’s development, the large number of scholars at American universities who are engaged in research, and that the country has once again become the host society for large numbers of international migrants. But the United States is not alone in opening its doors to immigration. Research into ethnic/informal economies is also conducted in immigrant receiving societies such as Canada, Australia, and in several European nations. Earlier immigration to South America also receives a good deal of attention. Numerous studies from various societies are reviewed in Aldrich and Waldinger (1990). This excel lent review considers how characteristics of an ethnic group and the structural opportunities (or lack thereof) they encounter jointly influence the emergence of ethnic strategies that facilitate the rise and maintenance of an ethnic/informal economy. The review includes several historical and contemporary examples of the importance of both structural opportunity (e.g., elite sponsorship of middleman minorities in Southeast Asia, Africa, the Ottoman Empire, and tsarist Russia) and group characteristics (e.g., the rise of the Chinese Vietnamese informal economy in Paris). Inasmuch as some relatively rich Asian nations are making use of guest workers from poorer Asian nations, we will probably see more research from this part of the world in the future – to the extent that these workers establish ethnic/informal economies.

Studies of how ethnic strategies develop and support ethnic/informal economies often consider the importance of ethnic based social net works. Focusing on the role of social networks in generating economic opportunities, Portes and colleagues (e.g., Portes & Bach 1985) con ducted an important study on an emerging Cuban economy in Miami. Ethnic solidarity facilitated the vertical and horizontal integration of a burgeoning business community. But an unclear picture emerged as to the economic implications of participating in the Cuban economy. Some of the research finds that working with fellow Cubans or other minorities negatively affects earnings and working under a Cuban boss has no effect on earnings. By contrast, other publications report that participation in the Cuban economy gives rise to advantages in occupational prestige, and occupational prestige positively associates with earnings. The importance of this latter finding is that it appears to counter the ecological hypothesis of assimilation theory, which contends that continued spatial segregation in terms of the labor market and residential patterns limits the upward mobility of ethnic groups.

An engaging debate arose over the question of whether the ecological hypothesis of assimilation theory was indeed inconsistent with the experiences of Cubans in Miami. The first exchange was initiated by the criticism that failure to distinguish between self employed Cubans and their employees accounts for the apparent disconfirmation of the ecological hypothesis. Sanders and Nee (1987) appear to show that the positive association between participating in the Cuban economy and occupational prestige is largely due to the occupational prestige of business owners rather than that of their employees. Hence, business owners financially benefit from participating in the densely co ethnic regional economy, but their employees tend not to experience such a benefit. This pattern implies the Cuban experience is similar to that of earlier immigrant groups. The debate was rejoined by Jensen and Portes (1992) and Sanders and Nee (1992). An earnings advantage is confirmed for Cuban business owners, but no comparable advantage is found for Cuban employees. Indeed, for men, a negative main effect obtains for employment in the Cuban economy. The bottom line is that ethnic/informal economies, like other market driven systems, not only generate wealth, they also generate inequality.

The field was beginning to concentrate less on any supposed earnings advantage that ethnic/informal economies provide to employees and more on how shared ethnicity facilitates internal forms of social organization and institutional behavior that increase employees’ chances of becoming self employed. Bailey and Waldinger (1991), for example, show how informal ethnic networks in New York City’s Chinese garment industry provide information to employers that helps them recoup the cost of training employees. These networks also provide employees with inside information that increases their chances of becoming self employed. Several subsequent studies have documented that informal training systems operate in various ethnic economies. But these systems, by facilitating greater self employment within an ethnic group, can drive up the cost of co ethnic labor and therefore immigrant entrepreneurs often draw from out group minorities to fill their labor needs.

As the literature converged on the importance of ethnic/informal economies as an engine to increase self employment, and thereby improve opportunities for upward mobility, some scholars were questioning the evidence that ethnic small business owners experience an earnings advantage. A key part of this critique is that the economic benefit to ethnic self employment may be largely due to business owners practicing self exploitation by working 70 or 80 hours per week. Others recognize the long hours of work required of ethnic entrepreneurs, but the literature generally regards this to be one of the costs of economic success through self employment. Portes and Zhou (1996) examine the argument that ethnic self employment fails to produce an earnings advantage. They find a substantial advantage to self employment, but this advantage is concentrated among unusually successful entrepreneurs as opposed to being spread throughout the business community.

Toward the close of the twentieth century, scholars continued to refine their understanding of the social bases of ethnic entrepreneur ship. Sanders and Nee (1996), for example, demonstrate that the family plays a key role in ethnic enterprise, much as it had with earlier immigrant groups. The family is a strategic resource in ethnic entrepreneurship because the social ties it embodies tend to be the most intense and trust evoking of all interpersonal relationships. This literature shows that, by focusing on the ethnic group as a resource for collective economic action, many scholars have overlooked the role of the smaller, more tightly integrated social institution of the family.

What has the literature taught us about the social bases of ethnic/informal economies? Researchers have revealed a number of informal mechanisms based on social relations that facilitate economic action. The most important outcomes of these mechanisms are the dissemination of employment and business related information, and providing access to informal financial institutions. Normative use of these resources and the repayment of debts are encouraged by enforcing trustful behavior under the threat of sanctions. Informal social bases of economic action tend to emerge among groups as members try to overcome limited economic options due to language barriers, poor human capital, or non fungible foreign earned human capital. And immigrant groups often face discrimination and prejudice. A tendency for group members to react to these problems by looking within their group for practical and emotional support encourages ethnic solidarity, which in turn encourages informal group practices that provide access to resources. Internally generated resources con tribute to the growth of self employment and this leads to increased opportunities for getting ahead. But there are winners and losers in the ethnic community. People seeking to better their lives and that of their family are involved in the rough and tumble environment of market economics. Even a modicum of success in small business usually requires outperforming some competitors and matching the performance of others. This is a daunting task because ethnic/ informal economies tend to be hotbeds of competition between small businesses.